Australia | Apr 17 2013
-Sofas2Go roll-out deemed successful
-Strong earnings growth profile
-Robust dividend yield
By Eva Brocklehurst
Furniture retailer Nick Scali ((NCK)) has picked a winner, it seems. Amidst a soft retail environment over the past year the company has managed to successfully roll out the Sofas2Go brand and stores. Analysts at Moelis recently met with management and came away comfortable that the growth profile of the company has improved markedly.
Nick Scali reported a 23% increase in net profit for the first half and a 17% increase in sales. Three new stores opened and there are now 38 in all. Moreover, earnings margins increased to 14.1% against 12.8% in the prior corresponding half, reflecting operating leverage from the higher sales base and an increasing contribution from Sofas2Go. Management has also attributed sales growth to gains in market share via internal factors such as product mix and successful promotional activities.
Moelis had flagged the concept of Sofas2Go as something to monitor over the past 12-18 months and now views the brand having the footprint of success. Moelis thinks a roll-out of four stores a year is in train. The six stores, four in NSW, one in Victoria and one in ACT, are approaching a scale that is generating gross margins just below the 60% level of Nick Scali. Management believes there is long-term potential for around 100 stores. The traditional Nick Scali brand has 32 stores and a long-term target of around 70.
The share price may have increased more than 30% since the first half result in mid February but Moelis thinks the price earnings ratio of 13 times FY14 estimates is still attractive. The FY13 earnings guidance is for growth of at least 20% and the broker has no problems envisaging that. Moelis has forecast earnings growth of 29% for FY13, 17% in FY14 and 13% in FY15. Dividends of 10.5c, 12.5c and 14c are expected for those years and equate to a yield of 4.6%, 5.5% and 6.1%, respectively. The stock is trading around $2.29 and the Moelis' target price is $2.65 with a Buy rating.
The NSW-based retailer has been in operation for around 50 years and imports over 4,000 containers of furniture per year, believing such volumes enable good buying and pricing power. The ranges cover dining, lounge and entertainment furniture. Stores are located in NSW, ACT, Queensland, South Australia and Victoria.
Nick Scali is not covered by brokers in the FNArena database.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
